Michigan court to weigh legality of Detroit pact

June 04, 2012|Reuters

June 4 (Reuters) - Michigan's Court of Claims is being askedto void an agreement reached in April that gave the stateoversight over Detroit's finances, opening a new front in anongoing battle over the state's emergency manager law.

Detroit Corporation Counsel Krystal Crittendon confirmed onMonday she had filed a complaint against the state and itsTreasurer Andy Dillon on Friday.

The complaint contends the financial stability agreement thecity council approved on April 4 was not valid under Michiganlaw and the city's charter because the state was in default tothe city.

The lawsuit lists more than $230 million purportedly owedDetroit by Michigan, including $224 million in revenue sharing,$4.7 million in unpaid water and sewer services at the MichiganFairgrounds and $1,225 in parking tickets on state vehicles.

"The Law Department has exercised its right to challenge theconsent agreement," said Detroit Mayor Dave Bing in a statement."Whatever the legal outcome, we will abide by it. But I'm notinterested in getting into any legal battle that will distractus from executing my fiscal stability plan."

The legal cloud has stalled some actions by the Detroit CityCouncil regarding the pact.

A spokesman for Dillon did not immediately respond to arequest for further comment on the complaint. However, the statetreasurer last month defended the agreement with Detroit as a"valid and enforceable contract."

The agreement gave the state more control over Detroit'ssagging finances, stopping short of having an emergency managerappointed by the governor to run the city, which has anaccumulated deficit of about $265 million.

Public Act 4, a 2011 law which boosted the ability of thestate to intervene in financially troubled local governments,was used by state officials to launch a review of the city andenter into the consent agreement. A battle over thatcontroversial law is being waged in various Michigan courts asopponents seek to void it on constitutional grounds or place ameasure on the Nov. 6 ballot asking voters to repeal it.

The preliminary official statement for the deal said that,while swap counterparties have not exercised their right toterminate the swaps due to the consent agreement, the city plansto use the upcoming deal to do so.

The POS also lays out various scenarios of what could happento Public Act 4 and to the city should it breach the financialstability agreement, noting the state treasurer would then havethe power to place Detroit in receivership. As for Crittendon'scomplaint, the POS states it was not clear when the matter wouldbe resolved and what the impact would be on the agreement.

Fitch Ratings last month cut its rating on about $1.4billion of senior lien sewer bonds to A-minus from A, citingrising debt levels. Moody's Investors Service, which dropped itsrating to Baa1 from A2 in April, continues to keep it on reviewfor another potential downgrade. The review's focus includes"the continued uncertainty of how the sewage system would betreated in the event of a (Detroit) bankruptcy filing," Moody'ssaid last week.

(Reporting by Karen Pierog Additional reporting by Caryn Trokiein New York; Editing by James Dalgleish)